Did TPG's David Teoh just outsmart the telco industry?

Camera-shy TPG Telecom chief executive David Teoh is known for keeping his cards close to his chest, however the 63-year-old billionaire appears to have played his hand beautifully.

The announcement this week that TPG was in discussions with Vodafone Hutchison Australia about a potential $13 billion tie-up was a gamechanger for the industry in this country.

Competition in the mobile sector has seen incumbents like Telstra rapidly cost cutting, slashing their workforces and acting fast to reposition themselves as something more than “just a telco” as phone plan prices fall, data inclusions rise and the National Broadband Network continues its roll out.

The reclusive TPG chief executive David Teoh.Credit:Daniel Munoz

And in the back of any mobile provider’s mind in the last year and a half has been TPG’s move to launch Australia’s fourth mobile network, which saw Telstra’s share price sink to a five-year low on the day it was announced in April 2017.

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Executives have long wondered whether Teoh could make a success of yet another mobile network in the Australian market (even highly populated countries overseas have found four providers to be one too many) particularly with $9.99 unlimited plans up for grabs.

Illustration: Joe Benke

Now, less than 18 months later, analysts and industry experts think the real motivation has made itself known in the form of a new joint Vodafone and TPG that would be similar to the size of Optus with a substantial customer base in both fixed and mobile.

Teoh's 'brilliant move' of the year

A tie-up with Vodafone is seen as making “imminent sense” by Watermark Funds Management principal Justin Braitling who says TPG has been preparing for its own earnings cliff in three years time when NBN payments kick in and margins begin to fall.

Braitling’s modelling estimates there could be $350 million worth of synergies with a Vodafone tie-up.

Intelligent Investor’s Gaurav Sodhi has also called it a “brilliant move”. Sodhi previously told investors the fourth network plans had been laughed at openly and called “crazy” by rival telcos, who had mocked the plan at the same time as fearing its ability to undercut the prices they were charging.

Telecommunications industry veterans know not to underestimate rich-lister Teoh, well-known for being so cost-conscious he was once willing to walk round the office to turn off the lights to save on the electricity bill, but as one executive says he’s “cheap but not a miracle worker”.

When he revealed a $600 million budget to build the network, this turned to confusion and outright ridicule with many describing his plans as a “bamboo network”. By way of comparison, Telstra spends more than $1.5 billion a year predominantly on maintenance for its already-built mobile network.

In May, Sodhi argued TPG’s current spectrum holdings, pre-existing backhaul through its fixed broadband network and no requirement to build or maintain “legacy” networks like 3G meant Teoh could make it work on a budget, particularly with a customer base of millions to sell to.

“TPG has spent 10 years building one of the strongest fibre networks in the country, so it actually starts with a really strong advantage, and that’s why the capital expenditure ... is so small,” he said.

“Their job is a small one, they have to build the towers to connect to their existing fibre base. Towers is the easy part, fibre is the hard part – they’ve done the hard part already.”

Teoh has got a really good track record. He owns a third of that business. His entire wealth he has put into that business

Gourav Sodhi

Teoh has been planning to deliver a network focused on highly-populated locations rather than building a national network, which would cover expensive and less profitable regional areas, potentially meaning a roaming deal with another telco would be required.

“Teoh has got a really good track record. He owns a third of that business. His entire wealth he has put into that business,” Sodhi said.

But some believe the move towards a fourth network was predominantly a way to bring Vodafone to the table.

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Was a fourth network ever on the cards?

Boost Mobile founder Peter Adderton has always been skeptical of a fourth network in Australia, with the American market of 320 million people unable to sustain four carriers, saying it would never have been profitable for Teoh.

“This was only ever a game of poker. TPG was playing poker, they spooked the market, and Vodafone just showed their hand which is exactly what I believe TPG was hoping would happen,” he says.

For Vodafone the deal allows it to expand more into fixed line internet and kills off a network that would have fought hard for its budget-sensitive customers, he says, but TPG are the real winners if the deal goes ahead.

So this was never Vodafone taking out an actual competitor, it is Vodafone taking out the potential threat of a competitor

Peter Adderton

“So this was never Vodafone taking out an actual competitor, it is Vodafone taking out the potential threat of a competitor,” he says.

Telsyte managing director Foad Fadaghi has a similar perspective on Teoh’s moves in a “fragile” telecommunications sector.

"It’s arguable there was never really going to be a fourth entrant and ultimately TPGs tactics were more about forcing Vodafone to the negotiation table," Fadaghi says.

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While share prices of rival telcos rallied over the last few days with the expectation there won't be a fourth network, some think the positivity is ill-placed with a larger third player potentially able to squeeze Optus and Telstra further.

There's also no telling whether the deal will go ahead - it's still early days, with both TPG and Vodafone keeping quiet since the merger was revealed to the Australian Stock Exchange, but sources close to the telco say an outcome is expected in "a matter of weeks".

Only those in Teoh's inner circle know whether this is what he planned all along - though industry members are calling it a "stroke of genius".

Independent telecommunications consultant Paul Budde said this was a “very rational decision” in a market “long dominated by egos” expected to boost subscriber numbers across the two businesses.

Budde believes Teoh is facing the reality that building out a network after acquiring spectrum is a “very costly exercise and ... very difficult for them to negotiate access with the other operators”.

“So this merger is going to save them lots of money, something the share market already likes,” he says.